Declining Technology Company Life Spans

The lifecycle of technology-based companies from their beginnings to peak market shares and profitability is shortening. There might be no such thing as a medium term investment in the sector.

MySpace has announced it will cut half its employees as part of an international restructuring. This comes after an earlier cut of 30%. It will now concentrate on its music delivery capability and act as a conduit to the more popular social networking sites rather than play that role itself.

In 2005, News Corp paid $590 million for the former social networking sensation as it strived to create a global multimedia presence. Now MySpace is a dispensable nuisance.

The MySpace retreat comes within days of Facebook raising $1 billion with the help of Goldman Sachs and trading at a price that values the company at an extraordinary $83 billion. LinkedIn, said to be seeking $175 million, is being valued at around $3 billion.

Putting aside what the MySpace misadventure says about Rupert Murdoch's business acumen, its decline illustrates how short lived many of our technological ventures have become. Related to this is a second phenomenon - how technology companies seemingly have just one shot at greatness before being trampled by the following pack they once led.

The past year has been dominated on the consumer technology front by the assault of Apple's iPad. The company has over many years carved out a unique niche for itself as the most innovative and market savvy of the international computer hardware sellers.

Its reputation has been reinforced by the startling back to back success of the iPhone-iPad double which has seemingly tapped a strong desire for computing mobility that others had underestimated.

The Apple share price has reflected this success rising 35% a year over the past five years while the NASDAQ composite index, often regarded as the primary indicator of technology company returns, rose just 3% annually. The Apple share price is now equivalent to 18.8 times the company's 2010 earnings.

To validate such a market rating, Apple cannot simply sit on its laurels - unless its laurels are connected in some way to a new electronic entertainment experience. This year's annual international consumer electronics show in Las Vegas signalled an avalanche of iPad-like devices hitting the market in 2011. Most of them will be cheaper than the iPad even if they are chunkier, clunkier and able to access far fewer applications than are available to the Apple user.

By the end of 2011, we will have access to a wide range of alternative mobile computing products using Android, Microsoft's new mobile operating system, possibly one from the now HP-owned Palm as well as variants innovated in the back blocks of China.

In other words, the best times for Apple might have already been. This is not such an iconoclastic thought. Not long ago, the supreme leader in mobile telephony had been Nokia. According to its December quarter earnings report, Nokia's share of the market has continued to slip even as it cuts prices dramatically.

Nokia earnings in the latest quarter were 24% lower than in the December quarter of 2009. Operating margins which had been 24.9% in 1999, 17.1% in 2005 and 12.5% in 2009 had declined to 10.9%. The company hoped for something better but braced analysts in its most recent briefings for the possibility that its profit margin could be as low as 7% in the first quarter of 2011.

The Blackberry, produced by the Canadian firm Research in Motion, quickly grabbed a large share of the business handheld market in part because it could impress corporate IT folk with its e-mail delivery systems. It had become so prestigious and the leader of the free world was such an ardent user he persuaded the US security services to set up an ultra-secure connection.

Blackberry, too, is endangered as others find ways of combining personal entertainment and appropriately sturdy business tools in one machine.

These companies have largely arrived, hit their peaks and started their declines within 10 years. Going back a little further, Palm pioneered the handheld business scheduling and productivity tool in the 1990s. It lost its leading edge position as others copied, improved upon and then out marketed the previous market leader.

The life cycle could be getting shorter. IBM hung on to its position as the owner of the standard personal computer brand for well over a decade. Initially, interlopers had to prove their machines were IBM compatible or risk consumer rejection. Now, branding is unimportant as personal computers become known simply by their operating characteristics - 2Gb RAM, 250 Gb SATA HDD, 2.3 MHz, etc.

The social networking revolution seems to be evolving similarly. Facebook, Twitter and LinkedIn are, by normal standards, barely more than months into their corporate life cycles. However, as the recently released movie about the founding of Facebook shows, these are not enterprises requiring multi millions of dollars to attract followers. Consequently, the barriers to entry are no greater than what it takes to keep an audience interested.

Apple has been around a long time but always played second fiddle as a PC marketer. Having demonstrated so conclusively to its current and all future competitors how much success depends on being able to anticipate consumers' next set of needs, can it retain its competitive edge?

And, then, there is Facebook and Twitter. Will they still be the social networking sites of choice in even 18 months, let alone five years? There is no reason to believe they will at the current pace of change.

If you liked this article and would like more by email, subscribe! It's free.

[Bold fields are required]

Your details

Your alternate email address is used only if messages to your primary email address are returned to us.

Mailing addressEmailAlternate emailFirst nameLast name

Industry

Do you work in the financial services industry?

Yes No

This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity.
Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.